“The time has come to apply the overarching purpose … of the Federal Court Act with some vigour to schemes, to ensure that they are conducted cheaply, efficiently and quickly.”
– Jackman J
The Federal Court of Australia has signalled a significant overhaul of its approach to schemes of arrangement which will streamline the court approval process and result in material efficiencies and cost savings for parties to M+A transactions undertaken by way of scheme.
At a case management hearing in In the matter of Vita Group Limited, Jackman J has laid out a new path for schemes of arrangement brought before the Federal Court of Australia (Court). The move, in respect of which Jackman J noted he had “strong views”, proposes a range of reforms to the practice and procedure requirements typically adopted in respect of schemes of arrangement to be better, and more vigorously, aligned to the overarching purpose of the civil practice and procedure provisions of the Federal Court of Australia Act 1976 (Cth), which requires matters be conducted quickly, justly and cheaply.
The scope of the proposed changes are outlined below. They are significant and have the effect of substantially reducing the evidential burden required to put the transaction through the Court, for both the scheme company and the acquirer and at both the first and second Court hearing stages, in compliance with the various obligations imposed under the Corporations Act 2001 (Cth), the Federal Court (Corporations) Rules 2000 (Cth) (Court Rules) and general Court precedent. Jackman J noted that the reforms, and the general new streamlined approach to obtaining the Court’s approval in respect of schemes, were being made following wide consultation within the Court to ensure the changes enjoyed support from the Court as a whole.
This is a significant development given the majority of significant public M+A transactions in Australia are executed via a scheme of arrangement.
The reforms outlined by Jackman J will relieve a scheme company from what can be burdensome and costly evidential requirements, reducing them down to only three affidavits (instead of the usual seven or more that are typically prepared) for the first Court hearing and only one affidavit (instead of the usual three or more that are typically prepared) for the second Court hearing.
In summary, those affidavits will be:
First Court Hearing
- An affidavit from the scheme company in support of the originating process.
- The main scheme company affidavit, which will give a broad overview of the scheme and associated transactions and the verification process, as well as other minor matters to satisfy the Court as to ASIC’s position and the position of the proposed Chairpersons of the scheme meeting.
- An affidavit from the acquirer in relation to its verification process.
Jackman J also noted written submissions should not be more than 10 pages.
Second Court Hearing
- A short affidavit from the scheme company confirming the results of the scheme meeting and exhibiting ASIC’s usual letter and conditions precedent certificates (if available).
Whilst it may go without saying, Jackman J noted the reforms were subject to a general qualification that more evidence may be required in certain circumstances, including to satisfy the ex parte disclosure obligations on the parties to bring important matters to the Court’s attention. That assessment will need to be made by the scheme company and its legal advisors on a case-by-case basis.
The reforms – First Court Hearing
ASIC engagement: ASIC’s usual letter of intent, together with a statement in the main scheme company affidavit indicating the date on which the explanatory statement was first sent to ASIC, will typically be sufficient for the Court to satisfy itself that ASIC has had a reasonable opportunity (and at least 14 days) to examine the terms of the scheme and the explanatory statement. There is no need to exhibit all communications between ASIC and the scheme company, however where ASIC has raised a legal issue that has not been dealt with in the draft explanatory statement, ex parte disclosure obligations may be a relevant consideration.
Independent Expert’s Report: An independent expert’s report (IER) is not expert opinion evidence, so there is no need for the expert to verify the IER in an affidavit or sign up to the expert code of conduct. The IER should simply be included in the draft explanatory statement.
Supporting affidavit: The affidavit from the scheme company in support of the originating process need only attach a recent ASIC search on the scheme company, and rules 2.4 (1) and (2) of the Court Rules will be dispensed with to the extent they are read to require anything more.
Chairperson affidavits: Rule 3.2 of the Court Rules does not require the chairperson and alternate chairperson of the scheme meeting to be put to the trouble of making an affidavit themselves or to confirm their previous relationship or dealings with the interested parties. Given the interlocutory nature of the first Court hearing, evidence can be given on information and belief that those individuals are willing to act in those capacities and don’t have a conflict of interest or duty except as disclosed.
Newspaper advertisement: The requirement for the publication of a newspaper advertisement in relation to the second Court hearing under rule 3.4 of the Court Rules will be dispensed with, provided the substance of Form 6 is disseminated via an ASX announcement by the scheme company prior to the second Court hearing.
Break fees and exclusivity: Given the conventional nature of most break fee and exclusivity provisions, there will typically be no need for evidence as to the negotiations of the exclusivity arrangements nor the belief of the directors that such arrangements are in the interests of shareholders, other than confirmation of the break fee as a percentage of the implied equity value of the scheme company (for consistency with the Takeovers Panel’s guidance).
Shareholder communications: The recent practice of seeking the Court’s approval for communications between the scheme company and its shareholders (other than with respect to a supplementary explanatory statement) is neither necessary nor desirable. This will also help to alleviate the tension that would otherwise exist between a scheme company’s responsibilities to the Court and its continuous disclosure obligations to its shareholders.
Evidence of dispatch: Evidence as to details of the scheme company’s register and despatch of scheme materials is not required. The process for despatch of the materials will be addressed in the Orders and the Court is entitled to assume its Orders are complied with. If there is a glitch in dispatch, then that should be brought to the Court’s attention.
Use of technology at the scheme meeting: The practice that has developed of adducing evidence, particularly during the COVID-19 pandemic, as to the use of technology at scheme meetings is no longer necessary given that such technology has become commonplace.
Shareholder participation: Evidence of shareholder participation or voter apathy, or the process for counting proxies, is not required unless there is any anomaly. Typically, the poll report will be the only evidence required as to whether the statutory majorities have been satisfied.
Conduct of the scheme meeting: Evidence of the conduct of the scheme meeting (including Q&As) is not relevant unless there is a significant issue of legal principle which was raised at the meeting which needs to be brought to the Court’s attention.
SPVs: Where the acquirer is a special purpose vehicle (SPV) and there is a consortium standing behind it that provides debt or equity commitments, there will typically be no need to submit evidence regarding the conditionality of those funding commitments. Shareholders will be protected by the usual term in the scheme itself that the shares are not transferred until the scheme consideration is paid.
Foreign counsel opinion: The practice to adduce evidence from the acquirer as to the execution and enforceability of the deed poll will be addressed when that situation arises. The matter the subject of the case management hearing did not involve a foreign acquirer.
The reforms – Second Court Hearing
The only evidence required is a short affidavit from the scheme company to annex the deed poll, the ASX announcement confirming details of the second Court hearing, the conditions precedent certificates (if available) and ASIC’s usual letter of no objection (if available).
The reforms being introduced by the Federal Court should be welcomed by M&A practitioners as they will significantly reduce the evidentiary requirements and thus streamline the process for seeking the Court’s approval of schemes of arrangement. They should also be welcomed by scheme companies as they will assist to make the process more efficient and somewhat less costly.
There have been calls from some quarters for schemes to be heard by a body other than the courts; these reforms may take some of the wind out of the sails of those calls.
The general qualification noted by Jackman J that these reforms are subject to the parties’ ex parte disclosure obligations is an important one, as it means that these reforms will have the effect of heightening the responsibility of the parties to bring important matters or aberrations to the Court’s attention. So, while these reforms have the potential to be of significant benefit to parties who are well-advised by experienced counsel, they can also be a pitfall for parties who fail to understand or comply with those obligations.
Gilbert + Tobin are acting for the acquirer on this transaction.